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What it is | How it works Is Bitcoin The Future of Currency?

Bitcoin
13 May 2013

Presented by Michael Parsons FCA |

Disclaimer: Bitcoin is not a recognised currency or monetary instrument in any jurisdiction

Bitcoin is a decentralised electronic cash system using p2p networking, digital signatures and cryptographic proof to enable irreversible payments between parties without relying on trust. Owned by no-one. No charge-backs. Bitcoin is driven by a reaction to 3 separate developments Centralised monetary authority Diminishing financial privacy Dominant legacy infrastructure Launched in January 2009 by Satoshi Nakamoto (unknown) Open source (built on cryptographic primitives) computer protocol that runs over the internet Elliptic Curve DSA and keypairs Double-spending prevented by a distributed time server implementing chained RPOWs SHA-256 Hash (incorporating distributed block chain)

What is Bitcoin?
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Differences between Digitised and Digital Money Digitised Money - Banks 1 2 3 4 5 6 7 8 9 Just digits/numbers Central Authority/Bank Banks hold electronic $/ Numbers cannot be stolen Paper money used as cash Physical Paper Money Counterfeit Notes & Coins Quantitative Easing-inflate All transactions recorded Digital Money - Bitcoins Cryptographic protocol P2P network issues bitcoins Consumers hold BTC in own wallets Bitcoins can be removed/stolen Bitcoins are (electronic) cash! No Physical Bitcoins Bitcoins cannot be counterfeited Bitcoin -fixed supply-Deflationary Anonymous recording in Blockchain No note printing-deflationary No-one controls Bitcoins. Total BTC issued capped at 21m over time. No private data given to merchants None, or 0.0005c miners fee
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10 Note printing-inflationary 11 Government controls currency & Legal tender 12 Private data compromised? 13 Transaction fees/Forex

Bitcoin Exchanges Distribution by market & currency


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An example of a working Bitcoin mining rig A liquid-cooled box of 4 Radeon HD5870 cards. This mining rig computes about 1.3Gigahashes per second.

Bitcoin Mining Rigs (De-Central Banks)


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An estimation of hashrate distribution amongst the largest bitcoin mining pools

BTC economy (Market Cap) Exchange rate Total Bitcoins mined Total Bitcoins over time Total Block count Divisibility to 8 decimals

US$1,250m US$120 11,133,000 21,000,000 235,465 0.00000001


*Source: bitcoinwatch.com

Bitcoin statistics
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Total issued over time


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For Bitcoin users:

Wallet.dat attack (on own PC) Online wallets Backups (USB stick, offline computer)

For Bitcoin companies:

Recent hacks at exchanges (BitFloor, Bitcoinica) Deterministic wallets


(recovered from seed eg. carbonwallet.com)

Multi-signature capability- also yubikey Offline backups Cold and Partitioned Wallets No One needs to know basis joint access Policies & Procedures + robust technology

Security Issues
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Wallets - Consumers Local client wallets (mobile: eg. Blockchain, Coinbase) Lightweight wallets (no blockchain multibit.org, electrumdesktop.com ) Web-based online wallets (full blockchain -bitcoin.org) Bitcoincard (smart card - solar powered in 2013) Merchant Processing BitPay (-like PayPal for Bitcoins) BitInstant (-buy bitcoins instantly) Bitmit (-like eBay for bitcoins) Bitcoin 24/7 (-receive and store bitcoins) Paysius (-accept bitcoin, receive US$ in your bank a/c) Mining Pools Bitcoin creation Deepbit BTC Guild Slush

Bitcoin Applications
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No direct legislation (similar to browsers) Variance in jurisdictional approaches ECB report on Virtual Currency Schemes- October 2012 Decentralised nature inhibits third party shutdown Exchanges will be a focal point of future government scrutiny (as bitcoin cannot be regulated as money) therefore allow a (single?) regulated Bitcoin exchange? Pressure on larger merchants who transact in bitcoins and perhaps BitPay payment processor

Regulatory Issues
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Bitcoin has the required currency attributes


Two-way convertibility Independent floating exchange rate Divisible and transferable (Non-political unit of account)

Opportunities for Government

Gain first mover advantage 1st regulated Bitcoin Exchange Bitcoin runs alongside existing currency UK could be the Bitcoin eco-hub of the World Enhance City of Londons status as Financial centre Taxation revenues would be significant

Future and Use Cases


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Bitcoin is, like Skype to telephony, and email to post, virtually free and disruptive to the existing bank and card (electronic) payment systems But it is perhaps just another currency? Which Government will embrace Bitcoin first? Bitcoin Eco-system would benefit from a UK regulated exchange anchor to provide world-class security and to develop mainstream usability and acceptance. And, better to have Bitcoin exchange transfers on the inside rather than (unregulated) outside. Bitcoin predicted to be mainstream in 3-7 years and matured in 10 years

Dawn of the Crypto Currency Economy...


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